“The Dotcom Gloom”: The Boom and Bust of the Dotcom Industry
Money plops down on the counter to pay for a new pair of shoes. Plastic cards swipe through to purchase a side table. Some people argue that society’s obsession with material goods comes from greed and decadence, but really it goes deeper than that. It comes from the noble tradition of capitalism. In the 1990s, America watched as the traditional face to face interactions of capitalism changed. It was changed through the Internet and is called ecommerce. First introduced to the government in the 1960s, the Internet grew steadily until the 1990s. With the launch of the World Wide Web to the public in 1991, companies such as EBay, Amazon, Google, and Yahoo sprout up quickly encouraging more than sixteen million people to use the Internet by 1995. Investments in the Internet boomed too, as seen in figure one. The Dotcom Bubble started in April of 1997 and lasted until June of 2003 (Business Insider). A myriad of reasons caused the Dotcom Bubble to happen but three reasons stand out in particular. The main reasons for the Dotcom Bubble were over speculation, newness of the market, and a drop in consumer confidence. Figure 1 (BBC)
Looking first at the definition of speculative, it can be seen that indeed the Dotcom Bubble was hugely speculated. A speculative bubble is “caused by exaggerated expectations of future growth, price appreciation, or other events that could cause an increase in asset values. This drives trading volumes higher, and as more investors rally around the heightened expectation, buyers outnumber sellers, pushing prices beyond what an objective analysis of intrinsic value would suggest” (Investopedia). To show how the stock market grew uncontrollably, one must look directly at the stocks to find the trends. Netscape is a good starting point for explaining how the bubbles grow. Netscape “went public August 9, 1995 at an offer price of $28. On the same day it hit a high of $74¾ and closed at $58¼. Netscape hit an all time high of $174 in December 1995 and split 2:1 February 7, 1996” (illinois.edu). With the encouragement of this success, many other businesses decided to go public, also called issuing an IPO, initial public offering. When Yahoo issued their IPO in 1995, their stocks gave a 130% return on the first day (Aguilar). With all the growth, people started to buy into the market more, as shown in figure 2. Figure 2 (nesta.org)
The sudden burst of people buying led the market to soar. Prices were inflated only because people would buy them. Stocks were rising higher and higher with no end in sight. People bought at high prices in order for a quick return that would make them lots of money. 446 companies went public in 1999 with an average first day return of 70%. CMGI shareholders were making up to 1700% of their original investment (siliconinvestor.com). From 16 million users to 248 million in a span of four years, no one ever predicted the Dotcom Boom’s demise. Looking at NASDAQ, the fall of the stock market is simple to see. As of “September 1st 2000 of NASDAQ, the trading was at 4234.33. The fall started after that and by January 2nd 2001 there was a drop of 45.9% and the NASDAQ was now trading at 2291.86. There was a drop of 78.4% from the 5132.52 of March 2000. In October 2002, the NASDAQ was trading at 1108.49” (DeGrace). This sudden drop in the stock market caused a scare, which completes the second part of a speculative bubble which says that “the bubble is not completed until prices fall back down to normalized levels; this usually involves a period of steep decline in price during which most investors panic and sell out of their investments” (investopedia.com). This makes perfect sense because as the stocks fall lower, people think they will lose a lot of money. This causes a panic where everyone sells at once but if no one holds stocks then there can be no stock market. This causes businesses to go bankrupt because of no...
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